The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Economic SYNOPSES short essays and reports on the economic issues of the day 2007 ■ Number 17 Stable Interest Rates Follow Stable Prices William T. Gavin n the 1980s, the United States and most other developed from a low of 0.90 percent to a high of 6.36 percent, which countries adopted monetary policies based on the goal was the average in the earlier period. At the long end, the of first achieving, and then maintaining, price stability. yield on 10-year bonds has averaged 5.02 percent and, on a Price stability can be defined as an economic environment monthly average basis, has never risen as high as 7 percent. in which people can make plans and contracts without worAnother benefit of price stability is that it stabilizes rying about inflation. Interest rates are a good indicator of people’s expectations about inflation. Hence, indications expectations about future inflation because most long-term of strong economic growth are less likely to foment expecshifts in the level of interest rates are due to changes in the tations of a long-lasting shift in the inflation rate. Also, market’s expectations about future inflation. under price stability, monetary policymakers are less comDuring the long period of achieving price stability in pelled to quell inflation fears during periods of fast economic the United States—from about 1983 until the mid-1990s— growth by raising short-term interest rates. The table illusinterest rates declined. In 1984, the yields on the 3-month trates this benefit by showing the average monthly standard Treasury bill and the 10-year bond peaked at 10.90 percent deviations of the respective interest rates, calculated from and 13.56 percent, respectively. By 1993, the yield on the daily data. This measure shows that expectations in the 3-month bill had fallen to 3 percent and the yield on the current era of price stability have been well anchored— 10-year bond dipped to 5.33 percent. Since the mid-1990s, that is, intra-month developments, such as data releases, inflation and interest rates have been relatively stable, reflecthave less effect on interest rates. ■ ing the relative success of monetary policy in maintaining price stability. The table shows statistics for short- and long-term interest rates for two periods. The U.S. Treasury Constant-Maturity Yields (% annual rates) first period, from January 1983 until December Term to maturity 3-Month 1-Year 5-Year 10-Year 1996, is one of declining inflation and inflation expectations. The average 3-month interest rate 1983:01 to 1996:12 over this period was 6.36 percent and the average Average 6.36 6.87 7.98 8.35 10-year rate was 8.35 percent. Minimum 2.93 3.18 4.71 5.33 The second period, from January 1997 to Maximum 10.90 12.08 13.48 13.56 the present, is one of relative price stability. A Monthly standard deviation 0.11 0.12 0.14 0.13 1997:01 to 2007:04 comparison of the two periods clearly shows the Average 3.69 3.94 4.66 5.02 advantage of price stability: Interest rates shown Minimum 0.90 1.01 2.27 3.33 in the bottom panel are, on average, 2 to 3 perMaximum 6.36 6.33 6.76 6.89 centage points lower across all maturities, with Monthly standard deviation 0.06 0.07 0.10 0.10 the largest declines in the longest maturities. At the short end, monthly average rates have varied I Views expressed do not necessarily reflect official positions of the Federal Reserve System. research.stlouisfed.org
@FedFRASER